‘Shocking’ trading statement reignites Premier’s demons, say City analysts

Premier revealed today that it predicts profits for the first half (H1) of 2011 will fall to between £65m-£70m versus H2 (second half) of 2010, with the trading decline attributed to commodity costs up 14% year-on-year, which have cost Premier around £150m.

As a result the food giant was forced to pass on price rises to customers, but said the “inevitable time lag”​ led to a £15m loss in Q1.

“In addition, as the result of our successful repricing exercise, one of our major customers ​delisted a significant number of our grocery lines,”​ at a cost of around £10m in Q2, Premier said, although it added that the affected lines had now been relisted.

The major customer is believed to be Tesco, with major lines affected between late March and late June including Hovis, Mr Kipling, Branston and Oxo.

A Tesco spokeswoman confirmed that no SKUs were now delisted from the Premier portfolio, but would not be drawn on how many products might have been delisted over the past few months, adding that Tesco never commented on relationships with supply partners.

Body-battered venture​

Thirdly, Premier took a £10m year-on-year profit hit at its private label chilled and cake business Brookes Avana, following the loss of a pie contract with Marks & Spencer that could cost up to 200 jobs​, which it said included a £5m restructuring charge at the firm’s Leicester site.

An “unprecedented” ​5% year-on-year decline in bread and grocery also dented profits, said Premier, with a depressed consumer environment worsened by unseasonably warm weather.

Clive Black and Darren Shirley at Shore Capital said that Premier had issued “one of the most surprising and disappointing updates for even this body-battered venture, we have had 10 downgrades from it since the questionable acquisition… of RHM.”​

Premier Foods share price was around 17.5p as we went to press, down from just over 25p prior to the release of yesterday's trading statement.

Expressing sympathy for cfo Jim Smart, “who has done much to soothe some of our concerns on Premier in the last year or so”​, Black and Shirley said the update “reignited old demons about the fundamental nature and state of this company”.​

Shore Capital added that the company’s announcement today that it would reduce capital expenditure and conserve cash flows, “must raise questions about Premier’s capability to sustain new product development and advertising and promotion levels”​ discussed at its recent ‘investor day’ in mid May.

Successful repricing exercise?​

Investec's Martin Deboo told FoodManufacture.co.uk that Premier's H1 profit prediction of £65-70m was lower than what "we considered was a pretty kitchen sink view of H1" ​.

He added: “It’s also important to note that they had a £10m helping hand from a pension item ​[a credit arising from reduced liabilities as a consequence of closing pension schemes], so the underlying H1 was really even worse.​"

Noting that “multiple problems persist”​ at Premier, Black and Shirley noted the ‘successful’ repricing exercise (noted above) that led to the M&S delisting, which cost £10m in Q2.

“Quite what a failed re-pricing initiative would have been the Lord only knows,”​ they said. “However, there is a serious point here in our minds about how in touch Premier Foods in particular is with the consumer and its customers with respect to pricing in this and prior pressurised times.”​

And despite Premier’s prediction that “slow market conditions”​ would improve in H2, the analysts said there was no reason to believe that the “new woes” ​facing the company would end on June 25.

“Premier states that Hovis trading should improve but this business is up against stronger competitors (e.g. Warburtons), to our minds, and we also need to see the outcome of the northern hemisphere harvests, which if depleted could cause further commodity inflation and so margin pressure," ​they said.

“With such imponderable items, the company itself also stating the need for a decent Christmas, which cannot be pencilled in, we expect substantial downgrades to our pre-warning £152m current pre-tax profit estimate.”​

Premier will report its half year results from January 1 to June 25 on August 5.